Why a framework is needed for green finance

This article is sponsored by Guernsey Finance.

Recent months have proved to be extraordinary times for climate discussion and green finance.

The contributions of the naturalist Sir David Attenborough, campaigner Greta Thunberg and the Extinction Rebellion protesters have put climate change and green issues on the front pages of newspapers and at the forefront of mind for politicians, company directors and investors.

Guernsey has taken the strategic decision to play a leading role in the development of sustainable finance, while continuing to have a focus on private capital and the private equity industry, playing to our core strengths of stability, service and security of market access, which will be an asset for managers seeking certainty at the time of Brexit.

Guernsey’s determination to be at the forefront of green finance is already bearing fruit. Having established Guernsey Green Finance, our strategic initiative to develop sustainable finance, and the Guernsey Green Fund, the world’s first regulated green investment regime, in 2018, Guernsey has established itself as a leading global player, developing a close relationship with the London Green Finance Institute and joining United Nations’ Financial Centres for Sustainability (FC4S) Global Network – one of just 24 members alongside some of the biggest global centers.

Guernsey and London have discussed how we can work together to promote and develop sustainable finance initiatives. The island, which has a longstanding symbiotic relationship with the City, is keen to play its natural complementary role in supporting London and UK global leadership in green finance. We agree that collaboration is key for the future of green finance development.

The Guernsey Green Fund offers green certification for Guernsey-based funds which meet agreed international criteria for green and sustainable investment for at least 75 percent of the assets of the fund.

The first registered Green Fund, ADM Capital’s food and agriculture focused Cibus Fund, immediately attracted further investment on the back of its designation. Since then we have seen established managers with strong green credentials, and London-listed funds, secure registration.

Investment sector experts with connections to Guernsey and green and sustainable funds agree there is a compelling environmental case for action, and that the business case for green investment also stacks up. There may be a massive finance gap for the transition to a low carbon economy, but that also represents huge opportunities for investors. Guernsey sees its role, alongside the wider international finance community, to bring investors and opportunity together efficiently to address the climate change challenge.

The Attenborough Effect

Research has shown us the three biggest barriers to success in this market are demand, supply and confusion over taxonomies. As specific taxonomies are developed, we want to offer a transparent platform product to provide certainty for investors. Guernsey is creating an environment that gives confidence to investors by delivering expertise, governance and regulation in support of their aspirations.

Earlier this year we carried out research at SuperReturn International in Berlin, which revealed that the private equity sector was still to grasp the scale of the related climate finance requirement, or the commercial opportunity.

Interest and appetite has been building – the majority of PE managers have already increased their exposure to green and sustainable investment and no-one suggested that they would not be increasing that exposure going forward. They cited external drivers such as investor demands and competitive forces, over issues such as superior returns and corporate social responsibility – suggesting the “Attenborough Effect” is a major driver of behavioral change in the PE sector.

However, they stressed that transparent verification and certification, as offered by the Guernsey Green Fund, and the importance of overcoming “greenwashing,” would be key to unlocking private equity for climate finance.

Substance

Further research both conducted by and commissioned for Guernsey Finance this year has suggested that substance, specialism and service are becoming key factors of reputational choice. Over three-quarters of managers and administrators questioned in a Guernsey Finance survey said substance was now increasingly important in locational choice, and one in three said substance was now “extremely important.”

2018 required strategic focus on meeting the new EU and OECD substance standards, ultimately placing the island on yet another whitelist when it comes to meeting international standards. Confirmation of Guernsey’s economic substance by the EU, and the white listing of our corporate tax regime in general, received in March this year, was a welcome endorsement of the jurisdiction, and stands in stark contrast to many other offshore specialist fund centers.

Private equity specialism

Guernsey has long offered a stable and secure base from which to operate, combined with more than 50 years of expertise as an investment funds jurisdiction, and a particular specialism in servicing private equity structures.

Our own research also showed that the role of private capital as a source of funds for the private equity industry is growing rapidly, particularly for smaller, boutique and specialist managers, while family offices are also increasingly taking a stake in the sector, and demanding bespoke arrangements which a jurisdiction such as Guernsey is well-placed to offer.

Guernsey has seen an uplift in business flows over the past 18 months and particularly at this moment, a pre-Brexit surge in activity as managers and advisors seek certainty and continuity of regime and market access, particularly in advance of October 31.

They know that Guernsey still has the ability to access European capital, irrespective of Brexit, through National Private Placement arrangements, which is a proven, smarter faster route to Europe than the passport, while NPPR is proving particularly attractive to US managers.

The US is increasingly a target market for the Guernsey funds industry, again the island’s expertise in private placement helping managers to access investment on both sides of the Atlantic. Guernsey is home to the fourth-highest number of funds and securities sold into the US under Regulation D private placement, outside of the US and Canada.

Complementing the City

In the run-up to Britain leaving the EU, Guernsey is looking at its position as a key asset for the City and enabling the UK to build on its global network post-Brexit.

We enhance the UK’s global network through our sophistication and experience in operating as a conduit for capital flows between different tax and regulatory environments.

The value of PE business structured in Guernsey is now more than £120 billion and the total funds under management and administration in the islands now tops £280 billion.

Private Funds CFO published research this year indicating three-quarters of private equity managers were expecting to grow assets under management by at least 20 percent in the next decade, drawn from both institutional and retail investors.

As a center of excellence for private equity, we are delighted to see its continuing success and contribution to economies and communities worldwide. Guernsey remains the leading offshore jurisdiction for private equity funds, due to our first-class financial services infrastructure and ability to evolve and innovate.